Question

Mighty safe fire alarm is currently buying 50,000 motherboard from motherboard, inc. at a price of $65 per board. mighty safe is considering making its own boards. the costs to make the board are as follows: direct materials $32 per unit, direct labor $10 per unit, variable factory overhead $16.00, fixed costs for the plant would increase by $75,000. which option should be selected and why?

Answer 1

We need to compare the total expenses between the two options. 
Option 1: We will purchase motherboards
        Expenses = $65 * 50,000
         Expenses = $3,250,000
Option 2: We will manufacture our own boards
         Expenses = ($32*50,000) + ($10*50,000) + ($16*50000) + $75000
         Expenses = $2,975,000

We choose option 2 since it is lesser by $275,000.